The grain market blows its top

Price changes on the Chicago Board of Trade this week have been dramatic. For the first time in two weeks, they also have not been all to the upside.

Prices finally broke the last few days, as the market jammed all the bad news it could find into the prices until they broke from the pressure.

Every buyer needs a seller, and the board had some trouble finding buyers after December corn prices made new all-time highs for eight days in a row.

Prices have been pushed for weeks by the late planting and slow progress of the crop, followed by record flooding in just the wrong places. The slow planting got the traders worried about fewer acres and lowered yields. The flooding, especially in the No. 1 corn state of Iowa, got traders worried about damaged and lost acres.

Corn almost $8

The result of the combination was December corn futures gaining most of $2 in three weeks. The contract hit an all-time high of 7.91 June 16 before breaking below 7.40 yesterday (Monday, June 23).

November soybean futures, meanwhile, gained nearly $4 in six weeks. November futures made a 15.64 high June 16, before breaking as low as 14.76 June 23.

As usual, every day that the markets went up convinced me that we were seeing the top. As usual, I was ahead of myself. As always, the market eventually turned around.

The ugly reality

After you get the wildly higher prices generated by hysterical news reports and the resultant over-reaction by Chicago, reality sets in.

The ugly reality is the crop size is cut badly. The not-so-talked-about reality is the rain patterns are improving the crop in areas where it is not flooding them.

The cure

Hidden in the din of crop damage talk is the reality that the high prices are the cure for high prices. Feeding will decline. Chicken numbers are down in central Pa., and hog and cattle people are suffering from feed prices and cutting numbers as they can. Ethanol plants are now unprofitable. Some are taking a break from production. Some will never be built.

So, the market is deciding if this is a breather while profits are taken out, or the party is over.

Reports murky

This week the party seemed to be over, but it might just be a reaction to the better Crop Conditions Reports that were assumed to be coming out from USDA after the close Monday. In fact, the reports confirmed better conditions.

The trouble with that is, the methodology is reported to not include the flooding damage. This is rather like studying the tooth decay in a gunshot victim.

As time goes on, we will get a better picture of the health of the crops that were not flooded and the survival of those that were. Are the nutrients leached so that the yields of the surviving corn are reduced? Will there be a mass planning of late soybeans to salvage something out of the floods? Are bean prices subject to more revision that the corn prices?

Rest assured that the worst Crop Condition Report is behind us. We will see improvement the rest of the summer.

Gradually, the hype will leave and the cold reality of what size crop we have and what size crop we need will come to play. What we are left with is a new set of numbers for the traders to use to try to estimate prices, which is what the Chicago Board of Trade does.

Yes, we have taken away all the carryout, but the prices have eliminated a lot of demand. The market does not know what prices should be, and will work every day to try to discover them.